Facebook Twitter



If you have a home equity line of credit, be prepared for a modest increase in the amount you have to pay each month.

That's because the prime rate, which lingered at 6 percent for years, shot up three-quarters of a point in just a few weeks, bringing the new prime at most major banks to 6.75 percent.Interest rates on many home equity loans are pegged to the prime rate as quoted in the Wall Street Journal, but there's a short lag time before the rate you pay catches up with the change in the prime.

Many lenders reset the rates for home equity lines every month, but others make the change at the quarter, which in this case will be July 1.

How much difference does three-quarters of a point make? Not too much on typical-size home equity loan.

For example, if you owe $45,000 on your credit line and are currently paying 7 percent interest - one point above prime - your interest payment in a 31-day month is $267.53. When the interest rate jumps to 7.75 percent, the payment will rise to $296.20, an increase of about $29 a month.

On a larger loan, say $100,000, the difference is larger, of course - rising about $64, from $594.52 to $658.22.

No one knows precisely where interest rates are headed, but the likelihood is that the prime rate will be even higher later this year, which could put some sting into the amount you'll have to pay.

With that prospect in mind, some homeowners may want to consider a switch:

- Lenders are still offering teaser rates on home equity lines in many parts of the country. You might be able to get an opening rate of 4.9 percent or less for three months, six months or even a year. If you don't have to pay closing costs, this is a good deal because you save a lot of money at that rate and you could switch again when the teaser rate ends if the long-term rate you're offered isn't a good one. If you do have to pay closing costs, make sure you like the long-term rate before signing up.

- Find a lender offering a home equity loan at the prime rate. For example, the Prudential Bank has long offered home equity loans at prime. Currently, the bank has an introductory rate of 4.74 percent for six months and then prime thereafter. But you have to pay 2 points (each point is 1 percent of the loan amount), plus closing costs that range from $900 to $2,000. You might well save more in interest than you pay in closing costs on this loan, but get the lender to do some calculations for you before signing on. Prudential operates in many cities and has a toll-free number (800-772-4778).

- You can get better deals in some parts of the country than in others. For example, AmSouth Bank is running ads in southern newspapers offering credit lines at the prime rate through the end of this year with no closing costs. But then the rate jumps to prime plus 2 points. By contrast, Chevy Chase Bank in Maryland is offering a teaser rate of 4.9 percent for nine months, no closing costs and a rate after that of prime plus 1 point.

The following chart shows the interest-only payments on a $45,000 home equity line at various interest rates, assuming a 31-day month:


4.9 percent.......$187.27

5.0 percent.......$191.10

6.0 percent.......$229.32

6.5 percent.......$248.42

6.75 percent......$257.98

7.0 percent.......$267.53

7.75 percent......$296.20

8.25 percent......$315.31

8.75 percent......$334.42